Profit Recovery is the process of recouping amounts paid for goods or services that aren’t delivered. It is a critical process for companies, as the financial health of a business depends on it. Often, profits are lost because of duplicate payments, overpayments, or failure to take credits and deductions. Profit Recovery firms use specialized tools and technologies to review the transactions of a company and uncover these problems. Using this data, they then pursue payment of the funds for a fee.
In accounting, the cost recovery method is a way to recognize revenue from the sale of goods or services that have been sold on credit. Under this method, profit is only recognized when the cash payments have recovered all of the company’s costs related to the good or service that was sold.
For example, if Shiny Clothes Ltd. sold clothes to multiple customers on credit, it will only recognize the $ 100,000 in revenue received from each sale when the amount of the cash payments received has recovered all of the company’s costs associated with those sales. This would mean that the $ 100,000 in revenue received by Shiny Clothes Ltd. in 2016 and the $ 100,000 in 2017 wouldn’t be recorded as income for those respective periods.
To utilize the cost recovery method of revenue recognition, a company must have an established policy and procedures in place to ensure that each sale is properly recorded. This requires a thorough review of all transactions and a systematic approach to the collection and recording of the data. It is a complex process, but one that can have tremendous benefits for businesses that employ it.
In the United States, companies are legally allowed to recover lost profits from an at-fault party if they can prove their losses with “reasonable certainty.” However, it isn’t always easy to do.
The key is to have systems in place that detect and correct these mistakes before they lead to a loss of money. For example, a streamlined system for processing purchase orders and invoices can reduce the number of credits that have to be recovered by profit recovery companies. In addition, a policy should be in place that rewards employees for the positive impact their efforts have on the company’s bottom line. For instance, Federal Express created the Golden Falcon and Bravo Zulu awards to honor employees for their outstanding service. The winners receive a gold pin, recognition in the company newsletter, a phone call from the chief operating officer and ten shares of company stock. The same kind of reward program could be put in place by a Profit Recovery firm.
